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The European Union (EU) consists of 27 member nations, which aim to operate under a single market in order to streamline the flow of goods, services, and capital. Of these 27 countries, 19 have given up their individual national currencies and replaced them with a common legal tender – the Euro.
The financial framework throughout the EU is one of the most complex and comprehensive regulatory systems in the world. It has provided the roadmap for free trade and economic growth. This complex framework is impressive not only for regulating the financial service sector throughout the union, but that it is also able to incorporate a multitude of tax structures of the affiliate states. Each nation has its own tax framework and they must work in total alignment with EU standards and measures of safe financial practice and anti-money laundering regulations.
Tax rates in Europe and the EU are largely comprised of direct & indirect taxation. Each nation independently defines the various elements of direct taxation such as taxable income, average tax rates, and minimum tax threshold. This results in each country having autonomy in developing its own national tax-related frameworks and rates. However, there is a common standard and understanding amongst nations who have a mutual objective of preventing double taxation and tax evasion.
In the case of indirect taxation, the European Commission does oversee taxation policies that are related to business and trade. The primary objective of this streamlined economic system is the free flow of resources. Another objective of these policies is to ensure a level playing field is created for all businesses that operate within the EU. Finally, the Commission’s oversight also ensures that businesses, employees, and other citizens in the EU are not subject to any tax inconsistencies.
Income tax rates in the EU are not standardized across all its member nations. The personal income tax slabs are set individually by each nation and subsequently that revenue is also spent autonomously by their government. Some nations have flat rates while others adopt sliding scales.
A majority of the EU countries have a progressive or marginal tax structure, which means that the income tax rate increases or decreases depending on the incomes generated. Therefore, a fair balance of the tax burden is borne by those who can afford it. Ultimately, it is the Governments who are generally able to earn more tax revenue through this income tax structure.
Despite the EU being a largely well-developed union consisting of a lot of nations, there are a few in particular that lead the pack in terms of development and standard of living. Research shows that the more developed nations have higher tax slabs, while the slightly underdeveloped ones account for reduced tax rates in Europe.
Personal income tax rates for EU nations are not uniform across the board. The EU is designed as a free-flowing zone and hence there is no specific rule for EU nationals who reside outside of their home country. Usually, however, the country of residency is where taxes are levied on total world income. An individual is deemed to be a tax resident when they spend more than six months of a year in a country.
Below are the maximum personal income tax rates as of 2022 for every EU state (in descending order):
Apart from the above mentioned EU states, below is a list of countries along with their maximum personal income tax rates, which are not part of the EU but are European nations:
Iceland- 46.25%; Switzerland- 40.00%; Norway- 38.20%; Liechtenstein- 24.00%; Serbia – 20%; Ukraine- 18.00%; Belarus-13.00%; Moldova- 12.00%; Bosnia and Herzegovina- 10.00%; Kosovo- 10.00%; Macedonia- 10.00%; Montenegro- 9.00%
European countries, just like many others, generate a large sum of their economic income through Corporate income tax. Corporate income tax rates are determined by which nation the company is based in (where they post-revenue) and their tax levy.
The EU nations and the Organisation for Economic Co-operation and Development (OECD) work together in order to systematize corporate income tax rates and economic policies. Due to the large discrepancies in how corporate income taxes are levied by member states, the OECD works alongside the European Commission, and other European nations, in order to ensure that certain states are not providing favorable taxation benefits to certain companies. However, countries such as Ireland and Luxembourg continue to have reduced corporate income tax rates and are used as tax havens by big multinational corporations. Companies such as Apple and Fiat have been beneficiaries of having entities in Ireland and Luxembourg’s reduced corporate income tax rates
Before delving into the various corporate income tax rates, it is important to understand the difference between statutory and effective rates. The statutory rate refers to the rate that is imposed, whereas effective rate is the eventual ‘reduced’ tax that is paid by companies after certain exemptions are met. Thus research shows that in many EU countries, the statutory tax is, on average, significantly higher than the effective tax.
Below is a list of statutory corporate tax rates by EU member states as of 2022 (descending order):
Apart from the above mentioned EU states, below is a list of countries along with their statutory corporate income tax rates, which are not part of the EU but are European nations:
Iceland- 20.00%; Switzerland- 14.93%; Norway- 22.00%; Liechtenstein- 12.50%; Ukraine- 18.00%; Belarus-13.00%; Moldova- 12.00%; Bosnia and Herzegovina- 10.00% ; Kosovo- 10.00%; Macedonia- 10.00%; Serbia- 15.00%; and Montenegro- 9.00%
In summary, the EU nations do levy a corporate tax, which on average is comparatively lower than other nations’ rates across the world. Amongst the European OECD countries, the average corporate tax paid is 21.70 percent, which, research shows, is quite reduced as compared to world standards.
The topic of Wealth Tax is a controversial one and most European nations have abolished it completely. In Europe, there is a Net Wealth tax and a Wealth Tax on selected assets.
The net wealth tax is based on all the net assets owned by an individual at the end of every year, rather than on incomes or revenue earned. Norway, Spain, and Switzerland still have a net wealth tax, whereas France and Italy have a comparatively reduced wealth tax system on select or limited asset classes.
Austria, Denmark, Finland, Germany, Iceland, Luxembourg, and Sweden are European countries that have recently gotten rid of wealth taxes.
Below is a summary of net wealth taxes in the only 3 European Countries which impose them:
France, Italy, and Portugal are European countries that exclusively levy a wealth tax on selected assets above a certain threshold.
Below is a summary of these countries regimes on wealth tax:
Please note that we have separate detailed tax guides for Portugal and Spain.Β
Although the concept of no taxes is non-existent in any European nation, Monaco has not levied income tax on its residents since 1869. Monaco, therefore, is home to some of the world’s wealthiest businessmen, professionals, and celebrities. In order to become a resident in Monaco, one has to open a bank account and make a β¬ 500,000 bank deposit, and either purchase or rent a real estate property. There is also residency requirement of at least three months per year in order to become a tax resident on the island.
Montenegro, although not part of the EU, has the lowest personal income tax rate of 9 percent. When it comes to corporate tax, Hungary and Bulgaria have a limited tax rate of 9 and 10 percent respectively. However, Ireland has a tax rate of 12.50%, making it one of the most popular destinations for big corporations to establish their entities.
Bulgaria has an income tax rate of 10 percent, which makes it one of the most tax-friendly countries in the EU (and the world!). Corporate taxes are also levied at 10 percent.
Finland has the highest statutory personal income tax rate of 56.95 percent.
Malta levies one of the highest corporate tax rates in the world at 35 percent on any company that operates on their island.
Hungary has an income tax rate of nine percent, which is the lowest in the EU. Montenegro, although not yet a part of the EU has a low-income tax rate of nine percent.
Of all the European countries, only Norway, Spain and Switzerland have a net wealth tax that is levied on the total assets owned by an individual. France, Italy, and Spain on the other hand, have a wealth tax that is to be paid on selected assets only.
Over the last few years, Austria, Denmark, Finland, Germany, Iceland, Luxembourg, and Sweden have removed wealth taxes completely.
According to EU law, there is a standardized Value Added Tax (VAT ) rate of 15 percent in the Euro Zone. VAT rates can be reduced to 5 percent depending upon the product or service. VAT is a very common taxation system that is a practice around the world. These rates are charged to a customer on the purchase of a commodity or service from a company.
Each EU country has their own social security law. However, they work in tandem to ensure that individuals residing in various EU countries do not lose their social security benefits. Under a common EU law, individuals can only be subject to one country’s social security benefits at a time. Therefore, social security contributions must be made where the individual works. These social security contributions must be made by both employers and employees and the rates of contribution depend upon each member state.
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